This is the number one reason I would not want to work for a startup. Even in the unlikely event that the company is successful, there's better than even odds that you won't be able to trade on that success for years to come. That means you're effectively locked in at the company until it suits the executives to let you out. No thanks. I'd rather have a higher salary and immediately tradable equity grants with a company that's already public.
In addition to that, the founders are signaling their own long-term lack of confidence by selling their shares when no one else is allowed to do so.
Employees are correct to pressure their employers to IPO or GTFO, especially considering that many of these companies are on a trajectory where they're worth less over time (e.g. the collapsing valuations of Uber, Lyft, Slack, "We", etc).
True in the case of wework yes but in the case of Airbnb the founders seem to have collectively cashed out only a few tens of million, which just sounds like they cashed out just enough to buy themselves nice cars or something
If I had 500 million in paper valuation and could turn 10 million into real dollars, I would do it and so would you. I would have to be an idiot not to do it.
Not being able to sell shares in private companies is a standard practice. There are good reasons for that. The reason public market is heavily regulated is to prevent fraud.
The fact that large shareholders can sell shares in companies is also a standard practice. You might not like it but it's not capricious either. The founders created the company, the investors put money in it. They get better kind of shares than an employee because their contribution is materially different.
> I would do it and so would you. I would have to be an idiot not to do it.
It's smart. That doesn't mean it shouldn't be criticized. It's forcing employees and others to take risks (specifically an equity position that cannot be partially sold to hedge against company failure) that the founders are not willing to take themselves.
Often yes but in this case I don't think so. These guys are worth _billions_. It would be financially imprudent to not cash out a little bit purely for diversification and buying a nice house or two.
If you'rea a founder in a world where you can fundraise enormous sums from private markets, why deal with the headache of going public?
>Starting in 2011, when the young company topped a $1 billion valuation, Airbnb prohibited workers from selling shares, while allowing its three founders — Chesky, Nathan Blecharczyk and Joe Gebbia — to cash out a total of $21 million.
This seems to be a common story with most startups. Founders making sure to get liquidity for themselves but not doing the same for employees.
I know there are always reasons, but I feel that restrictions on selling should be focused at the leadership or investor class. Locking up your employees while allowing leadership to cash out is a surefire way to piss on any goodwill that you may have built over time.
Also, it strikes me as just fundamentally wrong from a fiduciary point of view.
I spent most of my 20s (7+ years) at a startup that is currently a “unicorn”, and consequently have an ok amount of shares locked up in the same situation.
As the company’s valuation grew higher and higher the equity grants became significant lower. It was balanced out by my pay becoming more and more competitive vs other large companies. But eventuality I decided ~80% was as fully vested as I’ll ever be — Not to mention my boss and commute were driving me insane — and because I joined so early my options were cheap enough to exercise over time, so I called it quits.
Now I’m at a boring public company, commute via train, but with no hope of ever making big $$$ someday.
My overall mental health seems a lot better now. I hope I made the right call letting go of that 20%.
"and because I joined so early my options were cheap enough to exercise over time" --> So you were exercising regularly while the company still wasn't worth much? That's a best-case scenario. The problem comes when early employees have a low strike price but don't exercise until the valuation is high, either because of vesting or just not getting around to it. Anyone with, e.g. 50 cent Airbnb options is looking at a massive AMT hit if they wanted to exercise.
Yes, I exercised regularly so my tax bill was manageable.
The company's trajectory looked more like a hockey stick, so my taxes were negligible until later years — and by then my original grants were exercised, leaving only my relatively expensive refreshers with a lower delta to fair market value
Yep. That's the conundrum. If the company is doing so obviously well that the shares are likely to be worth something in the future, then they are almost certainly already valued high and have a huge potential tax hit. In hindsight, most hugely successful starts were still a big gamble in their early days when the share price was low and it wasn't the smartest thing to throw thousands, tens of thousands, or even more of your own cash at them.
I did, but for most of my tenure the company’s valuation was pretty low, meaning my original grants were pennies and the company’s fair market value was depressed, so taxes were manageable.
The way I thought of it when exercising was who cares if I lost a few thousand buying lotto tickets.
Some of my former coworkers didn’t exercise regularly and are now semi golden handcuffed*
*The company extended the exercise period to 10y shortly after I left.
"two tranches of employee equity that are set to start expiring in November 2020 and in mid-2021; those shares will become worthless if the company is not trading publicly by then, they said."
I don't understand the above statement. How does not being publicly traded make the options worthless? Doesn't it just make them more risky because you have to put up a pile of money w/o knowing when and at what value you will be able to sell?
Incentive Stock Options (ISOs) apparently have a 10 year expiration window on them. If you were granted ISOs in 2010 but did not exercise them, you may have less than a year remaining to do so before they are lost forever.
You could exercise them, but for an early employee at a company like Airbnb that may mean literally millions of dollars in taxes that would have to be paid on an asset that can’t be sold, one that is still speculative in nature.
This doesn’t just apply to ISOs, either. I’ve learned from friends similar stage companies that even RSUs in a private company have some sort of expiration window on them, meaning if the company doesn’t IPO before that date those shares can also be lost.
There are many ways for startup employees to be screwed over on equity, especially when the company seems to be delaying IPO as long as they possibly can.
If the options are expiring, the company can choose to 1) foot the tax bill for the employee via payment or buyback, or 2) reissue the options as RSUs. Only some companies make that choice, but it's certainly legally possible to work through the 10-year legal expiration for ISOs.
Yes, the article seems to not understand why people work at startups. The risk is high that your equity is worth nothing, the the reward at a liquidity event is large.
I encourage you to do your own research, but the general rule of thumb is you will make more money working for an established tech company even if you do pick a unicorn. Since most of the data I have for this isn't public I couldn't share it if I wanted to, but in addition to all of the public data you can Google I personally know about a dozen people who were employee #X (X is a single digit number) at companies that were acquired for more than their last valuation at over $1 billion and only 1/4 of them actually felt like it was good financial ROI.
Options usually have an expiry when granted, i.e. they need to be exercised (employee pays cash at the strike price for it) before the expiry.
You need to pay capital gains tax when the gains are realized, I.e. at exercise.
I’m just speculating here but I think the problem is that the value of Airbnb stock has increased so much that the taxes due on the capital gain large enough that these option holders can’t afford to pay it without a liquidity event e.g IPO, where they could just sell the acquired stock to pay taxes.
So these early employees that were compensated in options are in this weird place where they can’t afford to exercise and are short on luck if their options expire before an IPO.
Also if you leave the company, your options usually expire some time after (perhaps 90 days?). I think that’s why some employees are complaining the lack of an IPO prevents them from moving on.
I presume later employees are conpensated in Restricted Stock Units which don’t have this problem.
It is ironic that no one has disrupted this market yet. Pre-IPO shares can be traded - you just have to trade those with accredited investors, prior to the form S-1 filling. I'm sure there's plenty of accredited investors out there that would accept startup shares at, say, 5-10% discount. Put another 2-3% transaction costs on top of that and you got yourself a very nice and socially pleasing enterprise.
There's a trick around this which is called a forward contract. It's a contract that basically says you agree to transfer the stock in the future when you're able to do so, and in exchange you get cash now. It's almost like a loan, in a way, except the principal isn't due until the shares are liquid.
Depends on the terms of the contract :) The main pitfalls/problems are probably the cost associated with trying to do this, because you may need to hire a lawyer etc.
Sometime around 8-10 years ago, requiring company approval for secondary sales started becoming a popular restriction to put into ISO grants (prior to that, it was just right of first refusal on sales). It's largely unfavorable to employees, but it does prevent some pretty bad situations. The benefits of this restriction were explained to me as two major things:
1) By preventing secondary sales, the company can control the going price for the stock. This means when the company has an independent third party do a 409a valuation, they don't have to take into account high third party sales, which would push the 409a up. Not inflating the 409a is beneficial to employees that want to leave the company and exercise stock. It means their AMT tax hits won't be as bad.
2) It also means the company/board get to control who are investors in the company, and thus who has the ability to request to relevant internal company information (like financials).
Both of these points increase the power of the insiders over the power of all shareholders. It's very anti capitalistic, and I stand by calling these rules dirty.
Company is not supposed to control its share price. Company is supposed to be subjected to its shareholders.
It’s typically a condition of your options agreement. Unless you get a (company sanctioned) secondary sale somehow, you’re locked up until IPO or an acquisition.
You can sometimes perform some clever financial engineering with a forward contract and a motivated investor to get around this though.
Those are some really dirty rules - to have the company sanction the transfer of its own securities. In principle it should be the other way around (i.e. shareholders decide what the company does, not company decides what shareholders do). Do you have examples of such contracts?
“The attached document is part of the Startup Forms Library made available by Clerky as part of an initiative with Orrick and Y Combinator to streamline startup legal documents. By using or viewing the attached document, you agree to the Terms of Use for the Startup Forms Library, which can be viewed at https://www.clerky.com/site/form-terms.”
Transferability:
“You may not transfer this Option except as set forth in Section 6 of the Stock Option Agreement (subject to compliance with Applicable Laws). You must obtain Company approval prior to any transfer of the Shares received upon exercise of this Option.”
This is 100% standard for private companies, particularly startups. The company often prefers to buy back the equity rather than have it go to a disconnected third party. This First Right Of Refusal is often also explicitly outlined in the shareholders/purchase agreement. The largest shareholders with voting rights are who create this agreement.
It's not dirty: it keeps incentives aligned because the shareholders have common goals, and the terms are stated clearly upfront.
Right of first refusal makes sense, it still exists in Europe for publicly traded companies. Shareholders of companies that issue new equity can sell their rights to other investors, or exercise those rights.
But what we have here is not only that but also a prohibition on sale to an outsider. So not only "we can intercept the sale at the same price you offered to someone else" but also "we can block that sale even if we don't want to participate in it".
I joined Airbnb back in 2013 and I remember feeling this way when I worked there. It always seemed like people were saying "the IPO is just around the corner!" but of course it still hasn't materialized.
Anyway, it's nice that they've announced their intentions, but I'll believe it when it actually happens. For all we know they could pull a We and back out at the last minute.
My company (unicorn) allows all employees to sell shares and there is a market on Shares Post for them. All companies should allow such pre-public trades.
Hard to feel sorry for anyone there since it's extremely unlikely that Airbnb is going to leave hanging anyone with expiring options (i.e. the oldest and probably most valuable employees), and those people are almost all bound to make many, many millions of dollars. Not sure what the deal is with Chesky's hesitation to going public, but Airbnb is by all accounts a wildly successful company and folks are going to "get paid" as they they say in sports.
If you want to read about people with legit gripes about expiring options and lack of liquidity in an under-performing company, google any story about Palantir from the last five years.
> Airbnb is by all accounts a wildly successful company
I remember 5 years ago when I turned down a lucrative offer from Uber because I just didn't believe in the company. People told me I was crazy, that Uber was the future of transportation, and how could I not understand how stupid I was? I just looked the fundamentals and said it will never make money.
AirBnB and Uber are very different companies, the most notable difference being that AirBnB actually makes money. That said, AirBnB has lots of issues to be worked out before I would consider them a "wildly successful company" in the sense that they are not doing remotely as well as they should be considering how many years their competition was paying regulatory taxes and they weren't. Based on anecdotal evidence, their dark patterns are making their users grow to hate them more every day (not a great sign before an IPO) and they're making weird moves in the hotel space - that industry they were supposed to replace instead of become. And now they have real competition from HomeAway and others and I just don't see a growth trajectory for them anymore - honestly I see them shrinking in a few years. The fact that it took them until 2017 to generate a profit in a space where they own nothing, rent nothing, and have no expensive infrastructure in an enormous market where they didn't pay competitive taxes (but managed to win a local election despite this clusterfuck https://slate.com/business/2015/11/airbnb-defeats-prop-f-in-...) is a fucking alarm bell. More cities across the world are starting to ban their service, and laws are being created to actually enforce this. I am certain if this comment gets seen by many people I will get replies telling me why AirBnB is healthy, and all is well, and I just don't understand - just like I did all those years ago with Uber.
I'm not convinced AirBnB is going to exist in 10 years (for many more reasons than I listed in the paragraph above). Maybe I'm wrong. But until AirBnB is a public company for ~6 months and we can see their financials, watch the stock price fluctuate, and see how many people jump ship the moment their equity vests...well it's just another unicorn story where the VCs are pumping up the price to dump the stock.
Great analysis. Thanks for that. I admit I'm totally just an armchair observer here.
There are the market fundamentals, and there's the reality of irrational exuberance and whatever is likely to happen in the market regardless. So I still think they'll IPO at many tens of billions and mint as many millionaires as Facebook before any potential market realities set in.
This entire post is about making money. If you’re positing that your post was just about how you turned down Uber because the company wasn’t profitable then your comment has no relevance to this thread.
My entire post is about considering whether or not companies are going to succeed and thinking about that before accepting a job. You shouldn't blindly assume unicorns will be successful or would even be considered positive steps in your career (despite the money I turned down I am still incredibly happy I never worked at Uber).
Uber employees still can't sell their stock for nearly 2 months, and it's on a downward trajectory. I think many employees are going to be upset with their "reward" for joining the ubercorn when they realize their shares are not worth what they were told (this is very different from being told they're worthless, however).
You are right though that my original comment is a bit of a tangent, so I apologize if I wandered a bit too much.
This is why I do not care about stock options and work as a contractor instead of an employee. I'll always take X amount of money now over the promise of Y amount in the long run (like stock options, etc).
As someone whose spent nearly 13 years in the startup world my advice is this. Expect your cash comp to be your only comp and negotiate cash comp separately from equity.
Most startups fail... and even those who do succeed? The VC's get first payout... then founders... then maybe what's left for you...
Also there many other situations a company can pull to invalidate or take equity away from employees (think Zynga).
There is alot to gain in working at startup, just dont think the equity is the main reason to.
Off topic: I'm absolutely delighted with the cookie policy of this website. Everything other than basic analytics turned off by default. More should follow this example.
“It added independent board members and hired Dave Stephenson, a seasoned finance executive, from Amazon to become its chief financial officer. Current and former employees said they had taken the moves as signs that the company was finally set to reach the stock market.
In February, Stephenson was injured in a skiing accident. That slowed Airbnb’s IPO timeline, two people with knowledge of the situation said. An Airbnb spokesman said the accident did not have any impact.”
I don't understand this article one bit. Why is the article speaking in the present tense? Why have dreams turned into disillusionment now, once the company has already announced they're going to IPO in 2020?
The article bellymoans about how employees can't cash out their shares yet - well yeah duh, that's kind of the whole risk/reward aspect of startups. Maybe they go public. Maybe they go under. Maybe they take a long time to go public. Why the article is about Airbnb, which has set a deadline for going public already, escapes me.
.. very clear memory of an overflowing, stuffed-crowded room of undergrad aged applicants at an AirBnB recruitment event a few years ago.. basically, the closer to age 22 you were, the better, it seemed. The saying "do not trust anyone over thirty" with a very, very different twist.
